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The management and the board of the National Spot Exchange (NSEL) ignored an internal audit report prepared way back in 2011, which noted that the spot exchange was acting as a non-banking finance company (NBFC) without formal approval from the Reserve Bank of India (RBI).

The audit report for the period between April 1, 2011, and September 30, 2011, prepared by the then internal auditor, Mukesh P Shah & Co, further said that the books of accounts have been ‘restructured’ to avoid any formal application to the central bank for an NBFC licence.

“NSEL was taking higher risk of credit default as it does not hold any security or line. The activity entails funding of the transactions and the provisions of NBFC and the company has not secured any such licence as an NBFC for carrying out such activity and in order to avoid the application pertaining to NBFC, the transaction needs to be restructured in the books of accounts of the company,” said the auditor in its report.

The observations of the internal audit report are similar to findings of recent investigations by government agencies like the Income-Tax Department and the Economic Offences Wing (EOW), which have also revealed that NSEL was functioning as a platform for short-term financing and that the members did not have adequate commodities as collateral to back up their exposure on the exchange.

The auditor’s observations have also been highlighted by the Forward Markets Commission (FMC) in its showcause notice (SCN) sent to Financial Technologies India Ltd (FTIL), Jignesh Shah, Joseph Massey and Shreekant Javalgekar on October 4, a copy of which has been viewed by FE.

The commodities market regulator has questioned the ‘fit & proper’ tag of all the four entities, which, according to FMC, are “jointly as well as severally responsible for the unlawful, irregular and fraudulent activities as well as poor governance in NSEL”.

While FTIL is the parent company of NSEL, Massey and Javalgekar are former heads of Multi Commodity Exchange (MCX) and MCX Stock Exchange, respectively. Shah is the chairman and group CEO of FTIL.

If FTIL loses its ‘fit & proper’ tag, then the company would have to sell its 26% stake in MCX. The three individuals would also not be able to hold any position in a commodity futures exchange.

Sources, meanwhile, add that the entities in their respective responses to the FMC have challenged the jurisdiction of the regulator for issuing the SCN while ignoring some of the factual observations made in the notice. The regulator gave all the entities an opportunity for a personal hearing on Tuesday, wherein it is believed that they also challenged some of the findings of the forensic audit report prepared by Grant Thornton.

Another defaulter questioned

The Mumbai police have questioned Balbir Singh, promoter of LOIL group of companies, which, according to NSEL, owes more than R750 crore to the spot bourse. According to a senior official from EOW, Singh was questioned and his books of accounts examined. The police have already arrested the directors of two other defaulting firms — NK Proteins and Lotus Refineries. According to NSEL statements, LOIL Overseas Foods owed R93 crore, LOIL Health Foods R298 crore and LOIL Continental Foods R366 crore to the exchange. Cops have also identified nearly 166 properties of defaulters to be attached in the case. Around 100 properties have already been attached. Around 12 properties across cities like Mumbai, Ahmedabad and Delhi belonging to

NK Proteins — the largest defaulter — have also been attached. FE Bureau